This incredible technology could form the next great bull market

In the 1970s, the big bull market was in gold. That was the place to be.

In the Eighties, it was Japan. In the Nineties, it was tech. And in the Noughties, it was commodities.

But what about the Tens? What has been the great bull market of this decade? US stocks, maybe? Biotech, perhaps? London property?

Nope, so far, in terms of the gains at least, it was bitcoin.

What’s coming next? I reckon the next place to be lies in one of bitcoin’s offshoots – a technology you’ve probably never even heard of.

A short history of digital cash

As you may know, I’m just finishing writing a book about bitcoin. And, in the course of writing the final chapters, my eyes have been opened in a way that I didn’t expect.

The next great secular bull market is going to be about a technology you’ve probably never even heard of. You may not even be able to invest in it through traditional means – it’s that disruptive.

It’s going to change everything. Money, banking, the law, accounting, social media, email, gambling, web hosting, cloud computing – stock markets, even. It could be as significant as the world wide web.

Before I explain what it is going to do, I need to explain what it is.

Prior to bitcoin, there were plenty attempts at digital cash. They all failed. There was a reason.

If I send you an email, I can, if I want to, then copy and paste that email and send it to someone else. I could do the same with a picture, a document, a film – any form of digital code.

What’s to stop you doing the same with digital cash: cutting and pasting the code and spending the same money again and again? This is the problem of double spending – and it hamstrung digital cash developers for years.

Previous attempts got around the problem by having a central body log all transactions and police the network – rather as a bank does with fiat money.

But this would mean the currency was centralised – and the whole point about bitcoin is that it is decentralised. Bitcoin’s inventor, Satoshi Nakamoto, wanted a system that did not involve trust in a central body – he wanted to have nobody in charge.

He got around the problem using a huge public database. Every bitcoin transaction is logged on the database and confirmed, and everyone can see it. Once it is confirmed, the transaction cannot be undone. Ownership of that bitcoin is transferred, and it cannot then be re-spent by the original owner.

But who maintains the database?

Anyone with a powerful enough computer can, in theory, create their own bitcoins – this is known as ‘mining’. You download the mining software and run it on your computer. As you can imagine, given the price of a bitcoin, hundreds of computers all round the world have been set up to try and mine coins.

As the computers mine, what they are actually doing is competing to maintain the database – verifying all the transactions that have taken place. This happens every ten minutes. When the race is won, the new records are added to the database and the computer that wins is rewarded with bitcoins.

So the system is self-reinforcing. People, acting in their own self-interest (the reward of bitcoins) are maintaining the block chain and so bringing benefit to others. It’s wonderful Ayn Rand-type stuff.

This database is known as the block chain. And it is block chain technology where the next great bull market is just beginning.

Block chain – the root of the next big bull market

When Satoshi developed bitcoin, there were three things he was working on. First, this block chain. Second, a transaction system – he wanted to see if his tokens would achieve any sort of market value without official backing. In both cases he was wildly successful.

He had a third option. But he was so concerned with making bitcoin work that he deliberately neutered it. But now that bitcoin is up and running, developers are enabling this third option.

It extends the block chain technology beyond a money system, into a kind of replacement for the way the internet works today.

For example, we now have Bitmessage – a decentralised system of sending and receiving emails without Google or Hotmail or whoever the email service provider might be. So nobody can read your emails, except the person you sent it to.

You have Twister – like Twitter, but peer-to-peer and with no central body. It’s a much safer way to organise an Arab Spring or to indulge in a bit too much free speech.

You could register ownership of financial assets and have contracts verified on a block chain. This has all sorts of implications for Wall Street, the City and share registrars and brokers. You could register car ownership. The Land Registry could even be put on a block chain (about time that lot pulled their socks up – 50% of land in the UK is still unregistered). This could transform the legal system and slash costs.

You can have peer-to-peer gambling on a block chain; prediction markets; cloud computing; hosting; reputation and identity systems (username and password systems are on their way out).

You can also take traditional apps such as YouTube, Facebook or Netflix and make all these services run in a decentralised way with no central body controlling them. Why would you want that? Well, how much of your personal data is on Facebook? Who is monitoring your YouTube viewing? And think about the copyright implications for the TV and movie industries.

It is revolutionary stuff and it is happening now. In the course of writing my book, I spoke to Charles Hoskinson, head of Ethereum – a company for whom Satoshi Nakamoto is actually rumoured to be working. It has been dubbed ‘bitcoin 2.0’ – combining the decentralised block chain system central to bitcoin with a software development platform.

Says Hoskinson: “Bitcoin was an exploration of how can we build a decentralised value system, where we dis-intermediate the government and banks from the generation of money. Ethereum is extracting and saying what else can we dis-intermediate? Can we remove Dropbox from storage? Can we remove Rackspace and Amazon from hosting? Can we remove Las Vegas from gambling? Can we remove Wall Street from finance?

“And instead can we run these things in a decentralised way? We’re seeing how many other things in society we can actually decentralise… so that they’re not controlled by any one actor. We want to let people choose and program whatever disintermediation they want”.

Words like ‘block chain’ and ‘mining’ and ‘dis-intermediation’ are as alien to us now as ‘browser’, ‘website’ or ‘URL’ were 20 years ago. But in a few years they will be commonplace.

And it’s not just corporations that need to pay attention – there are huge implications for government too. If everything can be dis-intermediated and decentralised, then what does that mean for healthcare, welfare and education provision, and the bureaucratic megalith of middlemen currently involved. What indeed will be the purpose of representative democracy?

The revolution will not be televised. It will be time stamped on the block chain. It is all very exciting.

What this means for investors – keep your eyes peeled

As an investor, it is almost too early to buy in. There are no listed companies. There is no block chain tech ETF you can buy. There is no tracker fund (although it is coming – cryptocomposite are leading the way there).

Almost all of these companies are private and mostly self-funded (although Ethereum is doing some kind of fund-raising later in the year). Many won’t ever list, at least not in the current conventional way of capital markets.

But this is ground-breaking stuff – and investment products will soon come available, of that you can be sure. I’d say we’re about where the Internet was in 1991. There’s still plenty of time to get on board.

Keep your eyes and ears peeled.

Block chain tech. You heard it here first.

PS Dis-intermediation is not just about the block chain. My colleagues at MoneyWeek have just put together a major research report on how the process of cutting out the middle man is already transforming industries from utilities to banking to manufacturing. You can read their report – which is stuffed full of potential ways to invest in this theme – right here.

Equity release is a great idea in theory, says Merryn Somerset Webb. But in practice, anyone wanting to release cash from their house should just sell it.

mr clyde

Just one question – That bitcoin exchange that went bust, have the depositors got their money (bitcoins) back yet?

BIG BALLS

Many did, many didn’t.
MtGox was poorly run and as a result it went out of business due to growing too fast without the necessary systems in place along with no regulation.

I believe that the weeding out of poor companies in the Bitcoin space this early on was a good thing as the more successful run businesses will prosper.

Bitcoin has taken its negative press in the past but this is more from the backing of institutions who know their bread & butter is going to eventually vanish. Its like Email was to the postal service, Blogging was to the news papers and the invention of the printing press – i.e. a new & superior technology arrives which they attempt to ridicule and deflate, however it will become the main stream in the future.

Baxter Basics

There was a 30 minute video on the register about this sort of thing recently. Worth watching:

Ok – so when the ‘necessary systems and regulation’ are in place what exactly is the difference between ‘bitcoin’ (for instance) and gold,silver, $US, Yuan, Yen etc. Is it really being suggested that ‘bitcoin’ will be a safe store of wealth, completely free from manipulation, mis-appropriation and debasement?

BIG BALLS

Mr Clyde,
Each country and their tax systems (where it has been addressed) class bitcoin as either money or a capital asset.

For me its a bit of both.

As more and more vendors are accepting bitcoin as a means of payment you can use it as the equivalent of cash. Operationally at this level, the majority of vendors who accept the bitcoin ultimately receive their native currency as the bitcoin is converted into local currency at the spot rate at that time. Then the ownership of the bitcoin transfers to someone who was effectively bidding for the coins at one of the exchanges. Businesses save on bank processing costs and as a result will gain a competitive advantage by adopting the payment method in the long run v’s not adopting the payment method. More and more vendors will want to join over time, especially where international payments are made where FX charges etc can be rather expensive.

If we were to look at it as a capital asset, it has the ability to rise & fall in value depending on pure demand & supply. If we look at the cross-section of current owners, they are mostly owned by private individuals, but be aware, a very small amount of people own the vast majority of them e.g. Winklevoss twins etc. I’ve not seen any big financial institutions or governments try and buy any of them, as a result, they are free from manipulation from that point of view.

There is a total amount of 21 million of them to be mined, there are currently around 13 million of them in circulation and the rest will be mined at diminishing rates over the next 20 or so years.

Any asset can be misappropriated or stolen, you have to make sure that you are careful – paper wallets are the safest. There is plenty of good information on the web about storage etc.

If you look at the big bitcoin price movements, these have nearly all been as a result of activity in China and the government stance towards them.

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